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The Importance of Shareholder Value in Decision-Making

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The Importance of Shareholder Value in Decision-Making Miia Mäenpää The Importance of Shareholder Value in Decision-Making Business Economics 2016 1 VAASAN AMMATTIKORKEAKOULU Bachelor of Business Administration TIIVISTELMÄ Tekijä Miia Mäenpää Opinnäytetyön nimi The Importance of Shareholder Value in Decision-Making Vuosi 2016 Kieli englanti Sivumäärä 62 + 1 liitettä Ohjaaja Rosmeriany Nahan-Suomela Osakkeenomistajan arvo on aihe, joka on tänä päivänä noussut monen yrityksien kohdalla tärkeäksi arvoksi. Monet yritykset eri alueilta ovat implementoinut ky- seisen toiminnon omiin tavoitteisiin, mutta yrityksille jotka toimivat rahoituksen alueella on kyseinen toiminto ollut hyödyllinen uusista sijoituksista yritykselle. Osana tätä tutkimusta on tarkoitus tutkia miten osakkeenomistajan arvo on im- plementoitu yrityksen tavoitteisiin ja kuinka tärkeää osaa osakkeenomistajan arvo osana päätöksen tekoa, jonka avulla tässä lopputyössä voidaan ymmärtää arvon tärkeys. Osana teoriaa on käytetty teoriaa joka selittää kuinka osakkeenomistajan arvo voidaan implementoida yritykseen tavoitteisiin ja teoriasta löytyy myös viitteitä siihen, kuinka yritykselle on mahdollista neuvoa, miten voidaan muuttaa yrityksen omat tavoitteet, jolloin osakkeenomistajan arvo on otettu huomioon. Empiirisessä osassa käytettiin kyselyä jolla on selvitetty, kuinka yritykset näkevät osakkeenomistajan arvon ja onko sitä otettu huomioon päätöksien teossa. Kysely oli suunniteltu tutkimusta varten ja kysymykset oli tehty niin, että yrityksillä oli mahdollisuus antaa oman arvion osakkeenomistajan arvosta. Kyselyä on lähetetty valitulle yrityksille mutta monelta yrityksiltä vastaukset jäi- vät tulematta, joten oli päätetty lähettää kyselyn uudemman kerran toisille yrityk- sille, tällöin saatiin vastaukset Nordelta, johon tutkimus myöskin perustuu. Tuloksista voidaan päätellä, että osakkeenomistajan arvo on nykyään paljon enemmän otettu huomioon, kun aikaisemmin ja tämä päivänä on myös lisätty mo- neen yritykseen omiin tavoitteisiin. 2 VAASAN AMMATTIKORKEAKOULU UNIVERSITY OF APPLIED SCIENCES Bachelor of Business Administration ABSTRACT Author Miia Mäenpää Title The Importance of Shareholder Value in Decision-Making Year 2016 Language English Pages 62 + 1 Appendices Name of Supervisor Rosmeriany Nahan-Suomela The shareholder value approach has been a topic that has recently become im- portant amongst companies in different fields. However, this topic is very dis- cussed in the financial field. Companies that have successfully taken shareholder value approach as a part of their decision-making process have gotten a higher return on investments and can, therefore, ensure the flow of future investments. An area of this thesis is to study the importance of shareholder value in decision- making process. Both the objectives of company strategy and the actual manage- ment decisions are important for the company performance. It was studied how the shareholder value is considered among financial companies when analyzing the company performance. In the theoretical framework theories about the shareholder value approach were used to support the study. The theories of shareholder value approach gave a clear image of the specific tools that the top management can use in implementing the shareholder value into the company objectives. As part of the empirical framework, qualitative research methods were used in the study. A questionnaire was designed for this study with open-ended questions giv- ing the chosen companies a choice of elaborating their perspective about the shareholder value and how it is handled inside the company. The companies were chosen from the financial sector and the first batch of questionnaire was sent to companies focusing on investments. However, the response rate was lower than expected, which lead to sending a second batch of questionnaires and these were also sent to traditional companies including commercial banks. In the results it was discovered that shareholder value approach is important and when it is implemented correctly from the top management, can function success- fully and ensure a flow of future investments. Nordea has been able to ensure a high return to its shareholders by implementing shareholder value in all of its business units. 3 FIGURES Figure 1 ………………………………………………………….12 Figure 2 ………………………………………………………….14 Figure 3 ………………………………………………………….20 Figure 4 ………………………………………………………….23 Figure 5 ………………………………………………………….24 Figure 6 ………………………………………………………….30 Figure 7 ………………………………………………………….31 Figure 8 ………………………………………………………….31 Figure 9 ………………………………………………………….35 Figure 10 ………………………………………………………...36 Figure 11 ………………………………………………………...37 Figure 12 ………………………………………………………...38 Figure 13 ………………………………………………………...39 Figure 14 ………………………………………………………...42 Figure 15 ………………………………………………………...42 Figure 16 ………………………………………………………...44 Figure 17 ………………………………………………………...44 Figure 18 ………………………………………………………...45 Figure 19 ………………………………………………………...47 Figure 20 ………………………………………………………...50 Figure 21 ………………………………………………………...51 Figure 22 ………………………………………………………...52 Figure 23 ………………………………………………………...53 4 CONTENTS TIIVISTELMÄ ABSTRACT FIGURES 1. INTRODUCTION …………………………………………………6 1.1 Objectives of the study …………………………….................................7 1.2 The methodology of the study ………………………………………...…8 1.3 Structure of the study …………………………………………………....8 1.4 Limitations of the study ……………………………………………........9 2. THEORETHICAL FRAMEWORK ………………………………9 2.0 Definitions of management decisions ……………………….....................9 2.1 Definitions of Shareholder value ……………………………..................14 2.2 Maximizing Shareholder value ……………………………..………......15 2.3 Shareholder value drivers ……………………………….........................17 2.4 Shareholder value and effective capital market ……………....................19 2.5 Measuring Shareholder value and other traditional measurements …………....26 2.6 How Shareholder value is implemented into decision-making ………...30 2.7 Shareholder value creation …………………………………………...... 36 3. EMPIRICAL FRAMEWORK ………………………………... ...40 3.0 Research Method …………………………………………………...….40 3.1 Reliability and Validity …………………………………………...…...40 3.2 Chosen Companies …………………………………………………… .41 3.3 Nordea ……………………………………………………………….... 43 4. ANALYSIS OF EMPIRICAL FRAMEWORK …………….… .46 4.1 The results of the questionnaire …………………………………………46 5. CATEGORICATION OF EVALUATED RESULTS ……….…47 5.1 Category 1: Impact on management decision …………………………. 47 5.2 Category 2: Roles of formulas ………………………………………... .49 5.3 Category 3: Importance to company performance ……………………. 50 5.4 Category 4: Challenges of shareholder value approach …………….….52 5 6. DISCUSSIONS AND CONCLUSIONS ………………………...54 6.1 Discussions …………………………………………… …………...…...55 6.2 Conclusion ……………………………………………………………….56 7. FUTURE STUDIES ……………………………...………… ......57 8. REFERENCES ………………………………………………...…59 9. APPENDICES ……………………………………………….…. 61 6 1. INTRODUCTION The shareholder value approach has been widely discussed in the business world for a period of time. The shareholder value is defined as a company objective that has shareholder wealth as it’s highest priority. It has also other purposes inside the company, which includes maximize value through policies that enhance company earn- ings, maximizing market value of company shares and increase both the amount and frequency of shareholder wealth paid. The main reason for making this study is to find out how companies imple- ment shareholder value in the decision-making process. Decision-making is an important part of a company strategy, and therefore, one of the reasons why companies use this amongst decision-making process in the top management. As part of the company evaluation process, which is done after a period of time, it has been found that many companies from the financial field have been using varying formulas. These formulas evaluate the overall company performance and can give a val- id image of the performance of the company, however as can also be found in the theoretical framework, different formulas have been used including Net Present Value (NPV) and Economic Value Added (EVA). These traditional measurements evaluate the company performance and can give an idea if the company is maximizing its profits. All of these measurements lack the ability to assess the shareholder value and lack any kind of dimensions in understand- ing the most important aspects of the shareholder value approach. A part of the decision-making process includes the thought process when se- lecting a good decision. For each decision, it is important to carefully consider positives and negatives of each option. The decision-making is considered ef- fective, is it important foresee the outcomes. 7 The management decision is an important step of the decision-making process and when done correctly, can be implemented as well into the various compa- ny strategies for improvement and maximizing the company profit. 1.1 Objectives of the study The aim of this study is to find out how companies are implementing share- holder value as part of their objectives and management decisions, and there- fore, part of short- and long –term decisions. 1.2 Metholody of the study The main focus in this study will be in the qualitative research methods to find if companies from the financial field have been successful is doing so. In the empirical framework, the results are based on Nordea’s answers and it can be found where the shareholder value approach has been implemented success- fully. The shareholder value approach has grown as a big topic in the recent years, and since its arrival.
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